FSBO Blog

Thursday, February 21, 2008

Watch out for these sales pitches

If you're selling FSBO, you're likely to be approached by listing agents hoping to "convert" you. Watch out for these pitches:

1. "I have a buyer who may be interested."

Several agent-coaching websites, including this one, urge agents to pretend to have buyers in order to get a foot in the door.

Unfortunately, it's hard to distinguish between these phonies and legitimate buyers' agents. Here's a rule of thumb: Legitimate buyers' agents will quickly look over the house and leave. Listing agents will usually stay longer and try to bond with you.

2. "Studies show that agent-assisted buyers sell their homes for 16% more than FSBO sellers."

This statistic seems to be based on data in a 2005 National Association of Realtors study, which found that the median 2005 sales price for a home that was sold by an agent was $230,000, about 16 percent more than the $198,200 median price for a FSBO home.But it’s hardly fair to compare agent-assisted and FSBO sales prices. Many of those FSBO transactions (about 40 percent) were to buyers that the sellers knew, like family members, friends, and neighbors. One imagines that the sales prices in some of those transactions were set artificially low. The FSBO properties in the 2005 study also included a disproportionate share of manufactured and mobile homes, which surely dragged down the median price.

I'd go instead with a 2007 study by two Northwestern University economists, which found that FSBO sellers in Madison, Wisconsin, got roughly the same price for their homes as agent-assisted sellers, giving them "a significantly enhanced net sale price."

3. "Studies show that 90% of FSBO sellers eventually give up and list with a traditional agent."

Author Robert Irwin, in Tips and Traps When Buying a Home, writes that "[a]lmost 90 percent of sellers who start out trying to sell FSBO eventually give up and sell using an agent." An article by realestatecoach.com puts the figure at 84%. Steven Poscente, in a 1998 Realty Times article, wrote that "studies show that 70% eventually hire a Realtor." (He also claims, without providing evidence, that "80% of those who don’t say, 'Next time I hire a Realtor.'")

Are any of these statistics accurate or even plausible? According to the National Association of Realtors, about 13% of successful property transactions in the US in 2005 were FSBOs. But the only way that 70% of FSBO sellers could have given up and listed with an agent is for 43% of all home sales to have started as FSBOs. But according to the NAR, only 4% of agent-assisted transactions in 2005 were originally listed as FSBOs. The 84% figure and 90% figure are also implausible. For 84% of FSBOs to have given up, 81% of all home sales would have had to start out as FSBOs. For 90% of FSBOs to have given up, 130% of all home sales would have had to start out as FSBOs--a clear impossibility.

How about Poscente's claim that 80% of FSBO sellers who succeed in selling on their own would hire a realtor the next time? The NAR's 2005 study also calls that into question. In their survey, FSBO sellers reported the highest level of satisfaction with the selling process, with 80% "very satisfied" and only 3% "very dissatisfied." Of those who sold their homes through a real estate agent/broker, only 65% were "very satisfied" while 5% were "very dissatisfied."

4. “Your price is much too low.”

Listing agents may use this trick (called “buying a listing”) to rattle you into signing a listing contract with them. If you fall for it, the agent will typically raise the price, allow the home to languish on the market for a month or so, then urge you to bring the price back down. You lose in two ways: you’re stuck with an unethical agent, and you waste precious time by having your home on the market at an unrealistic price.

5. “I’ll advertise your home for free!”

(Click here to see an agent-coaching website that teaches mortgage brokers this approach.) Lots of legitimate websites (like ours!) will advertise your home for free. But some agents offer free advertising in order to grab leads for their businesses. The giveaway is that they use THEIR contact information--not yours--on the ads. When buyers call, the agent may tell the buyers about other properties, or offer to show them your property in order to capture the buyer’s agent’s commission. Either way, you lose.

6. “I’ll sell your home in 45 days or buy it from you myself!”

It’s not hard to sell a house quickly, even in a slow market. All an agent has to do is set a very low price for it. And the only way an agent could make good on a promise to buy all of his clients’ unsold houses would be to pay very little for them.

7. “No real estate agent will show your home if it’s a FSBO.”

Agents sometimes use this line to convert FSBOs into listings, but if you want to see what they really think, go to Craigslist.org and type “FSBO” as a search term. You’ll find that lots of FSBO sellers are licensed real estate agents selling their own homes (California law requires owner/agents to disclose that fact in their ads). Do you think agents would sell their own homes FSBO if they really believed that other agents wouldn’t show them?

The truth is that buyers’ agents are happy to show FSBO homes if they’re priced competitively and if the buyer’s agent’s commission is at least 2.5%. For one thing, it’s a violation of the Realtor Code of Ethics and California law for agents to steer buyers away from any listing. For another, agents--even unethical lawbreaking ones--have a strong incentive to show FSBO properties to their clients. If an agent refused to show a FSBO home, the buyers could easily find it on their own and contact the sellers directly. If they made an offer, the agent would likely get cut out of the deal completely. To prevent that from happening, buyers’ agents are quite eager to show their clients any FSBO homes they might want to buy. Showing the home--however briefly--allows agents to claim all or part of the commission if the deal goes through.

Here’s a rule of thumb: The easier it is for buyers to find your home on their own, the more their agents will want to show it. Advertise on Craigslist, Zillow, and our FSBO websites, use lots of signs, keep your flyer box full, and host regular open houses.

8. "Do you have a CLUE report available?"

This pitch is taken from an industry article on how to convert FSBOs. A CLUE (Comprehensive Loss Underwriting Exchange) report helps buyers find out if a property is going to be hard to insure. A seller might make this report available to buyers if the home is in a high-risk area that's prone to, say, flooding or wildfires. I'd be willing to wager that most agents in urban areas have never ordered or even seen a CLUE report.

But the purpose of the question isn't to learn about the insurability of the home--it's to convince you that you're in way over your head.

Don't fall for this. Once you get an offer, you can--if you want--get help with the paperwork for a small fraction of what a traditional agent would charge.

9. “Let me pre-qualify your buyers for you.”

Mortgage brokers sometimes offer to pre-qualify any buyers who wish to make offers, so you won’t waste time with people who can’t afford it.

Don’t let them. First of all, it’s unreasonable in a slow market to expect buyers to get pre-qualified before they can make an offer. Many buyers won’t stand for it. Second, pre-qualification requires buyers to reveal their wealth and income. No shrewd bargainer will want to reveal that information to someone on your team. Third, most mortgage brokers are also licensed to buy and sell real estate. What’s to prevent the broker from offering to show your home to callers in order to capture the buyer’s agent’s commission? Fourth, a pre-qual letter won’t protect you from unqualified buyers, since a buyer can lie about assets and income when getting pre-qualified. If you're worried about unqualified buyers, just ask them to append a pre-approval letter to their offer.

Finally, if the broker is giving you a kickback of any kind (e.g., free signs), both you and the broker may be violating federal law. The Real Estate Settlement Procedures Act (RESPA) “prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan.”

10. "If you like, I'd be happy to help you host open houses."

If you're offering a commission to buyers' agents, be aware that if an agent is hosting your open house for you, he or she will likely have a strong claim on some or all of that commission. Don't fall for this trick.

11. "Come to my free FSBO seminar. It may answer some of your questions."

This website, for example, recommends that agents host free FSBO seminars and sell books entitled Guerrilla Tactics for Selling Your Home. Save the Commission! And Make an Extra $50,000 to $100,000. But the real purpose of the seminars is to confuse sellers so they'll want to list with an agent.

So how do you keep listing agents from calling or visiting? It helps to include a polite phrase like “No listing agents, please” in your ads. If your property is on the MLS, also put “Listed on the MLS” in your online ads. It’s a violation of the Realtor Code of Ethics for agents to solicit sellers who are already represented, even if that representation is limited to a flat-fee MLS listing. Concealing your address or phone number -- or including crabby messages in your ads (e.g., “No agents!!”) -- will more likely deter buyers than agents. Calls from agents may be annoying, but they do help you gauge the effectiveness of your ads. If you’re not getting lots of calls, you probably need to increase your exposure.

Wednesday, April 11, 2007

Why you should think about lowering your price

Housing prices are, as economists say, “sticky downward.” While stock prices can plunge dramatically in a single day, housing prices sometimes take years before they fall enough to restore the balance between supply and demand.

Don’t blame buyers for this. They always adjust quite readily to the new reality of lower housing prices. Sellers, though, are slow to come around. And so we must wait while they gradually whittle their prices down to the new levels.

Here are some reasons you should consider cutting yours right away:

1. It’s often best to get out of a falling market as early as possible.

From 1991 to 1996, the median price of a home in California fell from $200,660 to $177,270—or by about 11.6%. In some areas, the drop-off was much more. Smart sellers were quick to lower their prices so they could get out early.

2. If you’re in a newer subdivision, there’s a risk that prices could fall much lower.

Many of your neighbors may already be “underwater” in that they owe more than their properties are now worth, and some of them may be facing foreclosure in the near future. A rash of foreclosures in your area could depress property values, since the homes are often resold at bargain prices.

3. Those statistics that are showing only modest declines in median sales prices may be misleading.

Many sellers (and builders) have been offering generous incentives and credits to sell their homes. So while the statistics are showing just modest drops in sales prices, the amounts sellers are actually netting have been dropping by quite a bit more.

Median sales prices can also give false readings if higher-end homes are selling better than starter homes. This seems to be the case in many markets. (For some evidence of this, click here, here, or here.)

When this happens, reported drops in median sales prices will tend to understate the extent of the downturn. Indeed, it's even possible for the median sales prices to rise in an area where all home prices are falling.

Here’s an extreme example that shows how this could happen: Suppose that there are just two kinds of properties in the town of Homesville: luxury homes and starter homes. In 2005, 200 luxury homes were sold for $800,000 each and 300 starter homes were sold for $400,000 each. In 2007, 150 luxury homes were sold for $600,000 each and 100 starter homes were sold for $300,000 each. Even though the prices of all homes in Homesville dropped by 25% between 2005 and 2007, the median sales price rose from $400,000 to $600,000.

4. It’s a great time to buy.

Your house may have dropped by 15%, but so has your replacement house. If you’re selling in order to trade up, this market may be working in your favor.

5. The amount you’re “bleeding” each month may be larger than you think.

Say you have a vacant $500,000 home with a $100,000 mortgage and monthly payments of $1,000 a month. You may think it’s only costing you $1,000 a month to wait for a buyer. Not so. You’re also missing out on an opportunity to earn interest on your $400,000 of equity. If the interest rate is 6%, you’re losing an additional $2,000 a month.

6. Those listing agents who keep telling you your price is too low may be giving you bad advice.

Some unethical real estate agents routinely tell FSBO sellers that their prices are too low in order to persuade them to sign a listing contract. This sales practice is known in the trade as “buying a listing.” A month or so after the contract is signed, these agents urge their clients to drop their prices.

7. The asking prices of neighboring properties may be giving you an inflated sense of your home’s worth.

In a falling market, many sellers have unrealistic expectations of what their homes are worth. Just because a neighbor with an identical model is asking $600,000 doesn’t mean that your house is worth $600,000.

Thursday, April 05, 2007

How to Choose a Flat-Fee MLS Broker

Listing your property on the Multiple Listing Service (MLS) gets you on Realtor.com, a national website that gets over 6 million visitors per month, and assures buyers’ agents that you will “cooperate” (pay them a commission) if they bring you a buyer who closes escrow.

In the past, you had to list your property with a full-service listing agent in order to get on the MLS, but no more. It’s now possible to get an MLS listing for a low flat fee. Here are the terms you should insist on from your flat-fee broker:

1. An Open Listing or an Exclusive Agency Listing with a cancellation clause

Both of these contracts allow you to find a buyer on your own without paying a commission. You can revoke an Open Listing Agreement at any time. Adding a cancellation clause to an Exclusive Agency Listing also allows you to get out of it whenever you want.

2. A contract signed by the flat-fee broker promising to forward all buyer inquiries to you

The Realtor Associations who manage the MLSs won’t allow sellers’ names and phone numbers to be displayed on Realtor.com or other public websites. Buyers are only allowed to see the flat-fee broker’s contact information. Some flat-fee brokers take advantage of this--when they get inquiries, they offer to show the home to the buyer in order to capture the buyer’s agent’s commission for themselves. Don’t let that happen--it could cost you thousands of dollars.

3. Posting on the proper MLS

Make sure your flat-fee broker promises to put your listing on the appropriate MLS for your county or region. If a broker lists you on an out-of-area MLS, you’ll get very few responses from local buyers’ agents.

4. The ability to rent a SUPRA electronic lockbox

Licensed agents have special keys that allow them to open these lockboxes to get keys to homes that are on the market. Many flat-fee brokers don’t carry these lockboxes, and you can only rent them from the broker who lists your property. If you use a combination lockbox from a hardware store, you'll find yourself repeatedly giving out the combination over the phone without being able to verify that the caller is indeed an agent.

Flat-fee brokers usually allow this, but some charge a fee for each change. You should be able to request up to five changes without paying a fee.

7. A Comparative Market Analysis

A CMA gives detailed information about comparable homes that have sold in recent months. It can be a useful tool for establishing an asking price.

8. Willingness to post multiple photos

Most flat-fee brokers will NOT post multiple photos on Realtor.com, since doing so is prohibitively expensive. But make sure your MLS broker is willing to post multiple photos on secondary websites. By the way, a trick for getting multiple photos onto Realtor.com is to order a virtual tour package. For less than $200, many virtual tour providers will create an "e-gallery" with a virtual tour and still photos that can be accessed by clicking a “spinning red house” icon on your Realtor.com web page.

Tuesday, January 30, 2007

New NAR Ads: True or False?

Earlier this month, the National Association of Realtors (NAR) launched a new 11-month, $40 million ad campaign, aimed in part at the For Sale by Owner (FSBO) market. "Two-thirds of For Sale By Owners would use a Realtor® next time,” one of the print ads declares. “The other third swear to never, ever move again."

Is selling a home without an agent really that awful?

Not according to the NAR’s own 2006 Profile of Home Buyers and Sellers. The national survey found that only 20 percent of FSBO sellers would use an agent next time, while 33 percent would sell FSBO again and 47 percent weren’t sure. Clearly, FSBO sellers are happier than the NAR’s ad lets on.

An earlier NAR 2005 Profile also suggests that many FSBO sellers would try it again. Of all the sellers surveyed, those who sold their homes without an agent or broker expressed the highest level of satisfaction with the selling process, with 80 percent "very satisfied" and only 3 percent "very dissatisfied." Of sellers who sold their homes through a real estate agent or broker, only 65 percent were "very satisfied" while 5 percent were "very dissatisfied."

Undaunted, the NAR’s media department has offered a second argument against selling FSBO: “[s]ellers who use a real estate professional make 16 percent more on the sale of their home than do sellers who go it alone.”

This statistic seems to be based on data in the 2005 Profile, which found that the median 2005 sales price for a home that was sold by an agent was $230,000, about 16 percent more than the $198,200 median price for a FSBO home.

But it’s hardly fair to compare agent-assisted and FSBO sales prices. Many of those FSBO transactions (about 40 percent) were to buyers that the sellers knew, like family members, friends, and neighbors. One imagines that the sales prices in some of those transactions were set artificially low. The FSBO properties in the 2005 study also included a disproportionate share of manufactured and mobile homes, which surely dragged down the median price.

For much of the past year, though, the NAR has gloated over the 16 percent statistic, claiming that it’s “one reason the level of unrepresented sellers has declined steadily in recent years.”

Again, the NAR Profiles tell a more complicated story. The number of unrepresented sellers has indeed dropped, from 18 percent in 1997 to 12 percent in 2006. But the most likely reason for this is that many sellers are now able to pay flat-fee brokers a modest amount to get them on the Multiple Listing Service and Realtor.com. These sellers are counted in the statistics as being “represented” by agents even though they put up their own signs, host their own open houses, do their own marketing, and negotiate on their own with buyers.

The decrease in the number of unrepresented sellers, in other words, doesn’t reflect a decline in FSBO transactions so much as a decline in the ability of Realtors to keep FSBOs off the MLS. Until recently, Realtor associations were often able to block these kinds of listings, but the Federal Trade Commission has largely put a stop to the practice. The thousands of ads that the NAR plans to air this year won’t just deal with FSBOs, of course. One TV ad, for example, talks about the importance of being protected by someone you can trust.

“Realtors adhere to a strict code of ethics,” declares the voiceover, “so you know you’ll be treated honestly.”

Friday, January 26, 2007

10 Common FSBO Mistakes

Buyers often drive by dozens of homes before coming up with a list of those they want to visit. If they can’t find your home, it may never get onto their short list.

2. Having an empty flyer box

Flyers lure buyers into your home, and help them remember its best features. They also keep buyers’ agents honest. In a slow market, some agents may be tempted to steer buyers towards their own listings—even though doing so violates the Realtor® code of ethics and some state laws. For example, an agent might discourage buyers from looking at homes listed by owners or other agents by saying that these homes have “problems” or that they’re overpriced. It’s harder for agents to do this if their clients have easy access to flyers.

3. Not getting on the Multiple Listing Service (MLS)

For a flat fee of just a few hundred dollars (with no commission for the listing agent), you can get a six-month listing on the MLS, Realtor.com®, and local MLS websites. It’s hard to imagine a more cost-effective way to market your home—Realtor.com® alone gets over 6 million visitors per month. As an added bonus, getting on the MLS will likely stop the flood of phone calls from listing agents who want your business. There’s one catch, though: to get an MLS listing you have to agree to “cooperate with” (i.e., pay a commission to) any agent or broker who finds you a buyer. But you should do this anyway. If you don't cooperate, you probably won't pocket all or even most of the commission savings. Buyers who make offers without the services of a buyer's agent usually expect a price discount.

4. Setting the cooperating broker’s commission too low

Unless your home is selling for at least $1 million, offer a 2.5 or 3% commission to buyers’ agents. Many agents are hard-pressed right now, so they’re paying close attention to commissions. As a result, homes offer higher commissions have a big edge over those that don’t.

5. Making it hard for buyers to contact you

Realtor® associations make it devilishly hard for buyers to find FSBOs and to get in touch with their owners. Realtor.com®, for example, won’t allow listings to be described as FSBOs, nor will it display a FSBO seller’s contact information on its public web pages. (Note: Though flat-fee MLS brokers are required to give their own contact information on Realtor.com® and other MLS websites, good ones will divert all buyer inquiries to sellers.)

All of this is frustrating for buyers who want to find FSBO homes on their own in order to capture the cooperating brokers’ commissions for themselves.

6. Letting a real estate agent host an open house

Allowing an agent to host your open house can entitle him or her to the cooperating agent’s commission if a visitor later makes an offer. For buyers hoping to capture the cooperating broker’s commission for themselves, having an agent at an open house can be a deal-breaker.

7. Setting the asking price too high

From 1991 to 1996, the median price of a home in California fell from $200,660 to $177,270—or by about 11.6%. Smart sellers were quick to lower their prices and many got out of the falling market early. A good rule of thumb in a slow market is to visit competing properties and price yours so that it’s one of the two or three best values in your area and price range.

8. Playing leapfrog with a desperate seller

Avoid getting lured into a price war if you’re competing with a desperate seller. If you win, you may get less for your house than it’s worth. If you lose, future buyers will likely learn of your rival’s sales price and use it when appraising your home. It’s sometimes better to let a desperate seller go first.

9. Taking your home off the market for the winter

If you wait until March to put your house on the market, you may find that prices have dropped over the winter and that your home gets lost in the surge of homes that come on the market in the spring.

10. Giving up and listing with a traditional agent

Listing agents normally charge 2.5-3% of the home’s sales price for their services. That comes to $15,000 to $18,000 for a $600,000 home. If you’re having trouble selling your home, you’ll likely get more bang for your buck if you use that money to either lower your price or boost the cooperating broker’s (buyer‘s agent’s) commission. In a slow market, buyers’ agents play a much larger role than listing agents in determining which houses sell.

Monday, August 14, 2006

Is the NAR Undercounting the FSBO Market Share?

In its annual Profile of Home Buyers and Sellers, the National Association of Realtors reports the percentage of respondants who sold their homes "For sale by owner" (FSBO), as opposed to those who "sold home using an agent or broker." According to the NAR, the percentage of FSBO sales has been declining slightly over the past few years, and was just 13% in 2005. Is this accurate?

In this blog, Russ Cofano argues that FSBOs in some areas might be "disguised."

In February, 2005, the Austin Board of Realtors, for example, tried to discourage flat-fee brokers by establishing a rule that prevented exclusive agency listings from being posted on Realtor.com. (Click here for the FTC report on this.) Exclusive agency listings allow the owner to sell property without paying a commission to a listing agent. The more traditional arrangement is the exclusive right to sell listing, which requires the owner to pay a commission to the listing agent if the house sells, even if the owner finds the buyer without the agent's help.

The Federal Trade Commission, while investigating whether the rule violated anti-trust laws, discovered that after the rule was adopted, the number of exclusive agency listings dropped dramatically--from 18% to 2.5%. This, Cofano argues, implies that would-be FSBO sellers may be finding alternative ways to list their properties.

A recent Money Magazine article seems to confirm his suspicion. It describes how discount broker Aaron Farmer has gotten around the Austin ban on exclusive agency listings:

Farmer in Texas charges a commission at closing and then automatically rebates the commission to the client. No money changes hands. The addition of that slight-of-hand in his contract is enough for Farmer to call his listing "exclusive-right-to-sell," a category of homes that do get listed on Realtor.com.

This supports Cofano's suspicion that the NAR has been undercounting the market share devoted to FSBOs. Farmer's clients, for example, would not be counted as FSBO sellers.

The FTC has recently put a stop to the Austin Board of Realtors' rule. It will be interesting to see how this affects the percentage of exclusive agency listings.

Wednesday, July 05, 2006

How many FSBO sellers eventually list with agents?

Author Robert Irwin, in Tips and Traps When Buying a Home, writes that "[a]lmost 90 percent of sellers who start out trying to sell FSBO eventually give up and sell using an agent." A pdf-formatted article by realestatecoach.com puts the figure at 84%. Steven Poscente, in a 1998 Realty Times article, wrote that "studies show that 70% eventually hire a Realtor." (He also claims, without providing evidence, that "80% of those who don’t say, 'Next time I hire a Realtor.'")

According to the Massachusetts report, the NAR found that 13% of successful property transactions in the US in 2005 were FSBOs. The only way that 70% of FSBO sellers could have given up and listed with an agent is for 43% of all home sales to have started as FSBOs. But according to the NAR, only 4% of agent-assisted transactions in 2005 were originally listed as FSBOs.

The 84% figure and 90% figure are also implausible. For 84% of FSBOs to have given up, 81% of all home sales would have had to start out as FSBOs. For 90% of FSBOs to have given up, 130% of all home sales would have had to start out as FSBOs--a clear impossibility.

How about Poscente's claim that 80% of FSBO sellers who succeed in selling on their own would hire a realtor the next time? The NAR's 2005 study also calls that into question. In their survey, FSBO sellers reported the highest level of satisfaction with the selling process, with 80% "very satisfied" and only 3% "very dissatisfied." Of those who sold their homes through a real estate agent/broker, only 65% were "very satisfied" while 5% were "very dissatisfied."